Pension funds divided on Dell deal

Pension funds have lined up on different sides of the proposal to take Dell Inc. private, as the company postponed until July 24 a shareholder vote on the deal.

The $165.5 billion Florida State Board of Investment, Tallahassee; the $25.9 billion Connecticut Retirement Plans and Trust Funds, Hartford; the $12.8 billion Illinois State Board of Investment, Chicago; and the $1 billion American Federation of State, County and Municipal Employees staff pension plan, Washington, already have voted their Dell shares in favor of the company-endorsed deal, led by Michael S. Dell, chairman and CEO, and Silver Lake Partners LP.

The Florida fund has 3.1 million shares,or 0.18% of the company's total 1.78 billion outstanding shares, Michael McCauley, senior officer-investment programs and governance of the Florida board, said in an e-mailed response to questions.

The Connecticut fund has 722,700 Dell shares, David S. Barrett said in an e-mailed response to questions. He is communications director in the office of Treasurer Denise L. Nappier, sole trustee of the fund.

The Illinois fund has 127,321 shares, said William R. Atwood, executive director; the AFSCME plan has 140,558 shares, said John Keenan, corporate governance analyst.

But the $166 billion California State Teachers' Retirement System, West Sacramento, and C$129.5 billion (US$124.5 billion) Ontario Teachers' Pension Plan, Toronto, voted against the deal, according to plan representatives.

The California fund owns 3.2 million Dell shares. Ontario plan officials didn't disclose the fund's Dell holdings.

T. Rowe Price Associates Inc. also is opposing the leveraged buyout, according to a February statement by Brian Rogers, chairman and chief investment officer, reported by Pensions & Investments. In addition, Yacktman Asset Management and Pzena Investment oppose the deal, according to a spokesman for Southeastern Asset Management Inc., who declined to be named. Southeastern joined with Carl Icahn and affiliated Icahn funds to call on shareholders to oppose the Dell deal, offering a counter proposal.

T. Rowe owns 4.09% and Yacktman and Pzena each 0.7% of Dell.

Kylie Muratore, T. Rowe Price spokeswoman, declined to comment.

“BlackRock Inc., Vanguard Group Inc., and State Street Corp., three of Dell's largest shareholders, indicated late this week that they're voting in favor of the Silver Lake-led deal, according to a person with knowledge of the matter,” a Bloomberg July 19 story reported. BlackRock, Vanguard and State Street previously opposed the deal, according to Bloomberg and other reports.

BlackRock owns 5.3% of Dell. Michelle Edkins, BlackRock managing director and global head of corporate governance and responsible investing, couldn't be reached for comment.

Linda Wolohan, Vanguard Group spokesman, and Anne McNally, State Street Global Advisors spokeswoman, said officials at their respective firms won't comment on their proxy voting. Vanguard owns 3.7% of Dell. State Street owns 3.4%.

Among other managers, Calvert Investments voted its 116,325 shares in favor of the Dell deal, according to Melinda Lovins, media relations manager.

Proxy-voting advisers Institutional Shareholder Services Inc.; Glass Lewis & Co. LLC; Egan-Jones Proxy Services; and Marco Consulting Group, whose services include proxy voting advice, recommended their institutional investor clients support the Dell deal:.

Dell's board Feb. 5 entered into an agreement with Mr. Dell and Silver Lake Partners to take the company private in a deal offering shareholders $13.65 a share in cash. Mr. Dell, who would remain as chairman and CEO, would be the majority ownerof Dell, while Silver Lake and its affiliate funds would own the rest of the company. Mr. Dell is now Dell's largest shareholder, holding 13.9% of the company's 1.7 billion shares outstanding. Dell stock closed July 18 at $13.12 a share.

Activist investor Carl Icahn and officials at affiliated Icahn funds and Southeastern Asset Management contend the deal undervalues Dell. They are offering a counter, conditional proposal. The Icahn funds together own 8.7% of Dell, while Southeastern owns 9.9%.

Mr. McCauley said in his e-mail he and other FSBA representatives “personally met with two members of the Dell special committee” — formed to review the deal by Dell's board and composed of Dell independent directors — “as well as senior investment staff of Southeastern Asset Management ..., discussing in detail the firm's current business strategy and the risks and rewards inherent in the proposed leveraged buyout. Although SAM's bullish valuation case and detailed company analysis is very well done and compelling, the alternative financing and recapitalization structures ... proposed by Icahn/SAM represent material risks not found in the LBO's all-cash offer.”

Greg Kinczewski, vice president and general counsel, Marco Consulting, Chicago, said in an interview the firm supports the Dell deal in part because of uncertainty about the ability of the Icahn/Southeastern group to carry out their proposals, as well as lacking details on their financing of the transaction.

The $14.9 billion Illinois State Universities Retirement System, Champaign, is among Marco's proxy-voting clients. Daniel L. Allen, ISURS chief investment officer, couldn't be reached for comment.

As for the reason Dell postponed the meeting, Mr. Kinczewski said, “I suspect (Mr. Dell and Silver Lake) are really trying to persuade some investors who are on the fence, or they will increase their offer.”

In a filing July 18 with the Securities and Exchange Commission, Dell announced the special meeting of shareholders to vote on the proposal the same day “convened and adjourned to provide additional time to solicit proxies from Dell stockholders. No vote was taken on the proposed transaction prior to the adjournment.” The proposal requires shareholder approval.

David Frick, Dell spokesman, declined to discuss the outreach of Dell and Silver Lake officials to institutional shareholders to win more support. “It's not uncommon in transactions like this to solicit more stockholders,” Mr. Frick said.

Strong proxy-voting opposition to buyout proposals is rare.

Since it began tracking the issue in 2005, FactSet SharkRepellent found that of 1,637 buyouts or mergers that have come to a vote, “we are only aware of 14 where target company shareholders voted down the proposal,” John Laide, Newark, N.J.-based vice president, senior product manager, FactSet Research Systems Inc., Norwalk, Conn., said in an e-mailed response to questions.

“As you would expect, these proposals are usually overwhelmingly supported: On average 75% of the votes outstanding were cast for the approval of the merger ... and 96% of the votes actually cast were for approval. Only 4% of the votes (on average) actually cast were against the merger.”

Michael Sicilia, media relations manager at CalSTRS, said in an e-mailed response to questions that the California fund rejected the Dell deal because “we believe the board did not use a rigorous sales process to achieve the best deal possible for shareholders, and the $13.65 offer substantially undervalues our shares in Dell.“

The Icahn/Southeastern proposal calls on shareholders to first reject the Michael Dell/Silver Lake proposal.

If that occurs, the Icahn/Southeastern group would call on the Dell board to schedule the company's annual meeting so the Icahn funds and Southeastern can each put forth six dissident nominees for directors. If elected, they would replace Dell's board and support the Icahn/Southeastern tender to offer a range of about $15 and $18 a share, depending on the outcome, for 72% of the outstanding shares, according to an SEC filing by the group. The other 28% of the company would remain publicly traded.

Marco's Mr. Kinczewski values the Icahn/Southeastern proposal at $14 a share.

Mr. Sicilia said in his e-mail that CalSTRS is “voting against the (Dell) deal offered by the board based on its own merit. We are not necessarily supporting the Icahn/Southeastern alternative.”

Ontario Teachers' Mr. Kondraski, in his e-mail, said, “We have not finalized our position on Icahn/SAM's alternative proposal.”

The Connecticut fund favors the Dell buyout under the state treasurer's office proxy-voting guidelines, which usually approve corporate reorganizations or restructurings, Mr. Barrett said.

Connecticut fund officials have not been contacted by representatives of either the Dell/Silver Lake group or the Icahn/Southeastern group, Mr. Barrett said.

Calvert favors the Dell buyout because “it offers shareholders a meaningful premium ... provides certainty of value, and transfers the risk of the deteriorating (personal computer) business and the company's on-going business transformation to the buyout group,” Ms. Lovins said in her e-mail. “The recommendation is based on our proxy-voting guidelines.”

Although the Florida board last October committed $100 million to Silver Lake Partners IV fund, John Kuczwanski, FSBA communications manager, said. The commitment didn't influence the fund's proxy vote. It has no investments with Southeastern or the Icahn funds.

Dell's $3.5 billion 401(k) plan has $59 million in company stock. Under an amendment to the 401(k) plan Dell adopted last October, the company limited individual plan participants' holdings in Dell stock to 20% of their total 401(k) assets. If a participant's holdings exceed the 20%, the company is required to sell the excess shares to reduce the participant's Dell holdings to less than 20%, mapping the proceeds to the rest of the participant's asset allocations, according to Dell's 11-K report filed June 26 with the SEC. Participants who hold Dell stock in the 401(k) vote their own shares, said Mr. Frick.